Pizza Hut 2010 Annual Report Download - page 109

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Changes in commodity and other operating costs could adversely affect our results of operations.
Any increase in certain commodity prices, such as food, energy and supply costs, could adversely affect our operating
results. Because our Concepts and their franchisees provide moderately priced food, our ability to pass along commodity
price increases to our customers is limited. Significant increases in gasoline prices could also result in a decrease of
customer traffic at our restaurants or the imposition of fuel surcharges by our distributors, each of which could adversely
affect our business. Our operating expenses also include employee wages and benefits and insurance costs (including
workers’ compensation, general liability, property and health) which may increase over time.
Shortages or interruptions in the availability and delivery of food and other supplies may increase costs or reduce
revenues.
We are dependent upon third parties to make frequent deliveries of food products and supplies that meet our specifications
at competitive prices. Shortages or interruptions in the supply of food items and other supplies to our restaurants could
adversely affect the availability, quality and cost of items we buy and the operations of our restaurants. Such shortages or
disruptions could be caused by inclement weather, natural disasters such as floods, drought and hurricanes, increased
demand, problems in production or distribution, the inability of our vendors to obtain credit, food safety warnings or
advisories or the prospect of such pronouncements, or other conditions beyond our control. A shortage or interruption in
the availability of certain food products or supplies could increase costs and limit the availability of products critical to
restaurant operations. In addition, failure by a principal distributor for our Concepts and/or our franchisees to meet its
service requirements could lead to a disruption of service or supply until a new distributor is engaged, and any disruption
could have an adverse effect on our business.
Risks associated with the suppliers from whom our products are sourced and the safety of those products could adversely
affect our financial performance.
The products sold by our Concepts and their franchisees are sourced from a wide variety of domestic and international
suppliers. Political and economic instability in the countries in which foreign suppliers are located, the financial
instability of suppliers, suppliers’ failure to meet our standards, product quality issues, inflation, and other factors relating
to the suppliers and the countries in which they are located are beyond our control. These and other factors affecting our
suppliers and our access to products could adversely affect our financial performance.
Concerns regarding the safety of food ingredients or products that we source from our suppliers could cause customers to
avoid purchasing certain products from us. Lost confidence on the part of our customers would be difficult and costly to
reestablish.
Our operating results are closely tied to the success of our Concepts’ franchisees.
A significant portion of our revenue consists of royalties from our franchisees. Because a significant and growing portion
of our restaurants are run by franchisees, the success of our business is increasingly dependent upon the operational and
financial success of our franchisees. While our franchise agreements set forth certain operational standards and
guidelines, we have limited control over how our franchisees’ businesses are run, and any significant inability of our
franchisees to operate successfully could adversely affect our operating results through decreased royalty payments. For
example, franchisees may not have access to the financial or management resources that they need to open or continue
operating the restaurants contemplated by their franchise agreements with us. In addition, franchisees may not be able to
find suitable sites on which to develop new restaurants or negotiate acceptable lease or purchase terms for the sites, obtain
the necessary permits and government approvals or meet construction schedules.
Form 10-K